Monday, April 2, 2012

Stock Index Chart Patterns – S&P 500 and FTSE 100 – Mar 30, ‘12

S&P 500 Index Chart

The S&P 500 index chart has been creeping higher, using the rising 20 day EMA as a support. All three EMAs are moving up in tandem and the index is trading above them. A bullish pattern of higher tops and higher bottoms implies that the bull market is alive and kicking.

The technical indicators continue to show negative divergences by touching lower or flat tops, but remain bullish. The slow stochastic has slipped to the edge of its overbought zone. The MACD is touching its signal line in positive territory. The RSI has dropped down after briefly entering its overbought zone. The ROC has bounced up after touching the ‘0’ level. Stay invested with a trailing stop-loss.

A double-dip recession in the US economy may be off the table, but economic indicators are giving mixed signals. Durable goods orders rose less than estimates. Consumer spending grew higher than expectations. Home prices continued to slide. Initial jobless claims came in at 359,000 – lower than the previous week’s 364,000, which was adjusted upwards from 348,000). AAII’s sentiment survey showed a drop in bearish sentiment, while bullish sentiment remained flat.

FTSE 100 Index Chart

The FTSE 100 index chart shows that the bears are fighting back. The index managed to climb up above the 20 day EMA last week, but failed to test its previous top. A sharp correction has dropped the index below its 20 day and 50 day EMAs, and the 5800 level. As long as the index trades above its rising 200 day EMA, the bulls will remain in the game.

Of greater concern is the fact that the FTSE has formed a bearish pattern of lower tops and lower bottoms, and is in a down trend. Volumes were the highest on Tuesday and Thursday (Mar 27 & 29), which were down days. That is a sign that ‘smart money’ is moving out.

The technical indicators are looking bearish. The slow stochastic has fallen sharply towards its oversold zone. The MACD has dropped into negative territory below its signal line. The RSI has crossed below its 50% level. The ROC is deep inside the negative zone. Any upward bounce towards the 50 day EMA is likely to be used as a selling opportunity by the bears.

Eurozone may be slipping into recession with double-digit unemployment at the highest level since 1997, and manufacturing PMI dropping to a 3 month low of 47.7% in Mar ‘12. By contrast, UK’s PMI rose to 52.1% (above 50% means expansion), but recovery remains feeble. There is a possibility (as per OECD) that GDP growth for Q1 may turn negative.

Bottomline? Chart patterns of the S&P 500 and FTSE 100 indices are going in divergent directions. The bulls are in control of the US market. Hold on for the ride. The bears are asserting themselves in the UK market. Book profits, or hold with a strict stop-loss at 5700.